Strategic HRM and the HR Scorecard

CHAPTER		T Three
Strategic HRM and the HR Scorecard	3
Lecture Outline
Strategic Overview HR’s Strategic Challenges The Strategic Management Process Types of Strategic Planning Achieving Strategic Fit HR and Competitive Advantage Strategic Human Resource Management HR’s Strategic Roles HR’s Strategy Execution Role HR’s Strategy Formulation Role Creating a Strategy Oriented HR System The High- Performance Work System Translating Strategy into Policy and Practice HR Strategy in Action: An Example The HR Scorecard Approach Creating an HR Scorecard Using the HR Scorecard Approach The Hotel International: An Example The HR Scorecard	In Brief: This chapter explains how to design and develop an HR system that supports the company’s strategic goals.  It explains the strategic management process, how to develop a strategic plan, and the HR manager’s role in the process in strategy execution and formulation.  It discusses how to create a strategy oriented HR system and reviews the HR scorecard approach to creating a strategy oriented HR system. Interesting Issues:  The Human Resource function today continues to play an increasingly visible role in the strategic planning and management process, requiring a new level of skill and competency among HR professionals. The authors suggest that the most potent action HR managers can take to ensure their strategic contirbution is to develop a measurement system that convincingly showcases HR’s impact on business performance. To design such a measurement system, HR managers must adopt a dramatically different perspective that focuses on how human resources can play a central role in implementing the firm’s strategy.

ANNOTATED OUTLINE

I.          HR’s Strategic Challenges

           

A strategic plan is the company’s plan for how it will match its internal strengths and weaknesses with external opportunities and threats in order to maintain a competitive advantage.  The HR strategy needs to support the company’s strategic plan.  In formulating their HR strategies, HR managers must address three basic challenges: 1) support corporate productivity and performance improvement efforts; 2) employees play an expanded role in employers’ performance improvement efforts; 3) HR must be more involved in designing – not just executing – the company’s strategic plan.

           

            A.  The Strategic Management Process:

           

Strategic management is the process of identifying and executing the organization’s mission, by matching the organization’s capabilities wit the demands of its environment.  It consists of several related tasks:

                 1.    Define the Business and Its Mission – Managers choose strategies to get the company from where it is to where it wants to be tomorrow.  The company’s vision is a general statement of its intended direction that evokes emotional feelings in organization members.  The mission is more specific and shorter term, communicating “who we are, what we do, and where we’re headed”

                 2.    Perform External and Internal Audits – SWOT analysis is a commonly used tool that identifies the company’s strengths and weaknesses, opportunities and threats.

3.      Formulate new business and mission statements – Decides on new business, products to sell, where to sell, and how the products differ from competitors.

4.      Translate the Mission into Strategic Goals –  Operationalize the mission by getting specific around goals.

5.      Formulate a Strategy to Achieve the Strategic Goals – A strategy is a course of action, showing how the enterprise will move from where it is now to where it wants to be as stated in its vision, mission and strategic goals, given its opportunities, threats, strengths and weaknesses.

6.      Implement the Strategy – Translating the strategies into actions and results.

7.      Evaluate Performance – Assessing progress toward strategic goals and taking corrective action as needed.  Strategic control keeps the company’s strategy up to date, and identifies where adjustments need to be made

B.  Types of Strategic Planning – Managers have three levels of strategic planning.

                 1.    Corporate-level strategy – Identifies the portfolio of businesses that comprise the company and the ways in which these businesses related to each other.  Diversification, vertical integration, consolidation and geographic expansion are all examples of corporate level strategies.

2.      Business-level/competitive strategy – Identifies how to build and strengthen the business’s long term competitive position in the marketplace.  Companies try to achieve competitive advantages for the business they are in, which allow them to differentiate its product or services from those of its competitors to increase market share.  Examples of competitive strategies include cost leadership and differentiation. 

3.      Functional strategies - identify the basic course of action that each department will pursue in order to help the business attain its competitive goals.

      

When You’re On Your Own:  Using Computerized Business Planning Software.  There are several business planning software packages available to help the small business owner write top-notch strategic and business plans.

                 

C.    HR and Competitive Advantage

In order to have an effective competitive strategy, the company must have one or more competitive advantages.  Technology itself is rarely enough to set a firm apart as most companies today have easy access to the same technologies, so that the real differentiation is people and the management system.

D.    Strategic Human Resource Management

HR strategies refer to the specific courses of action the company pursues  to achieve its aims.  It means formulating and executing HR systems that produce the employee competencies and behaviors the company needs to achieve its strategic aims.

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NOTES

Educational Materials to Use

 

II.         HR’s Strategic Roles

            A.   Introduction

                  1.   HR is increasingly assuming more strategic planning responsibilities and involvement in the process.  Among their contribution to strategic planning are identification of human issues that are vital to the business strategic, helping to establish and execute strategy, and forecast potential obstacles to success.  HR Managers can provide alternative insights and are centrally involved in creating responsive and market driven organizations.

2.   In order to play this role, HR managers need an in-depth understanding of the value creating proposition of the firm.

            B.   HR’s Strategy Execution Role

Strategy execution is traditionally the heart of the HR manager’s strategic planning job.  The company’s HR strategies should flow directly from its company-wide and competitive strategies. 

C.    HR’s Strategy Formulation Role

              

1.     HR increasingly plays an expanded strategic planning role, to include working with top management to formulate the company’s strategic plans.  Formulating a company’s strategic plan requires identifying, analyzing, and balancing the company’s external opportunities and threats on the one hand and its internal strengths and weaknesses on the other.

2.     HR Management is in a unique position to supply competitive intelligence that may be useful in the strategic planning process, such as competitors’ incentive plans, pending legislation, and the company’s internal human strengths and weaknesses.

3.     By working closely with top management, HR is able to build a persuasive case through a strategy oriented HR system to shows how the firm’s HR activities contribute to creating value for the company. 

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NOTES

Educational Materials to Use

III.        Creating a Strategy Oriented HR System

            A value-creating strategy-oriented HR process consists of three basic components which comprise what some experts refer to as a company’s basic HR architecture:

1) HR professionals who have the strategic skills required to build a strategy oriented HR system; 2) HR policies and activities that comprise the HR system itself; and 3) Employee behaviors and competencies that the company’s strategy requires that emerge from the actions and policies of the firm’s strategy-supporting HR system.

            A.  The High Performance Work System – Managers and HR experts advocate that the HR system itself be a high-performance work system, maximizing the overall quality of human capital throughout the organization.

1.   Evidence suggests that high performance HR practices, combined with new technology, produce better productivity, quality, sales, and financial performance.

     

2.   HPWS practices include high-involvement organizational practices, high-commitment work practices, and flexible work assignments, as well as practices that foster skilled workforces and expanded opportunities to use those skills.

B.    Translating Strategy into HR Policy and Practice – The basic model of how to align HR strategy and actions with business strategy is outlined in Figure 3.9. HR management formulates HR strategies, policies, and practices aimed at achieving the desired workforce skills, attributes, and behaviors.  Metrics are identified which can be used to measure the extent to which new HR initiatives are supporting management’s strategic goals.

C.    HR Strategy in Action:  An Example – This example illustrates how Einstein Healthcare’s HR managers formulated and used HR strategies to execute strategic plans.   The example explains how the vision to change the organization into a comprehensive healthcare network providing a full range of high-quality services in various local markets required numerous changes in the organization and human resources.  Behavioral outcomes by the CEO from which HR developed five key HR strategies aimed at creating the required employee competencies, skills and behaviors.  Specific programs and practices were then developed by HR which contributed directly to achieving the organization’s strategic aims.

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NOTES

Educational Materials to Use

 

IV.        The HR Scorecard Approach

            HR creates value by engaging in activities that produce the employee behaviors the company needs to achieve strategic goals. Managers use an HR Scorecard to measure the HR function’s effectives and efficiency in producing these employee behaviors and thus in achieving the company’s strategic goals. The HR Scorecard – shows the causal link between the HR activities, and the emergent employee behaviors, and the resulting firm-wide strategic outcomes and performance.

A.    Creating a HR Scorecard - Three types of information are needed to create a HR Scorecard. 

1.   Company strategy information 

2.   Causal links between HR activities, employee behaviors, organizational outcomes, and the organization’s performance

3.   Metrics that can be used to measure HR activities, emergent employee behaviors, strategically relevant organizational outcomes, and organizational performance.

B. Using the HR Scorecard Approach – There are ten steps involved in using the HR Scorecard to create a strategy-oriented HR system (see Figure 3.11)

1.     Define the business strategy – In this step, management translates its broad strategic plans into specific actionable goals.

2.     Outline the company’s value chain – Here the manager identifies the strategically relevant outcomes and required employee behaviors by identifying the value chain, which identifies the primary activities that create value for customers and the related support activities. The value chain is a tool for identifying, isolating, visualizing, and analyzing the firm’s strategic activities and strategic costs.  This step allows managers to better understand the activitiesthat drive performance in their company.

3.     Outline a Strategy Map – A summary of the chain of major activities that contribute to a company’s success, the strategy map shows the “big picture” of how each department’s performance contributes to the achievement of company goals.

4.     Identify the strategically required organizational outcomes – In order to achieve its strategic goals, every company must produce critical, strategically relevant outcomes. 

5.     Identify the required workforce competencies and behaviors – Competencies and behaviors such as personal accountability, working proactively, motivation, courteous behavior, and commitment drive organizational performance by producing strategically relevant organizational outcomes.

6.     Identify the required HR system policies and activities – The question in this step is “what HR system policies and activities will enable us to produce those workforce competencies and behaviors?” The answer might include things like special training programs or changing the compensation plan. These policies and activities are often referred to as “HR enablers”, which create and make possible the HR “performance drivers” – the workforce competencies and behaviors that produce the strategically relevant organizational outcomes.  Once these enablers are identified, the next question that follows is, what specific form should these policies and activities take?  How and to what end should systems and processes be changed? The HR system must be aligned with the company’s specific strategic needs. At this point, the HR manager must become precise about the actual form and design of the firm’s HR deliverables.

7.     Create the HR Scorecard – In this step, the question is how are the organizational outcomes, workforce competencies and behaviors, and HR system policies and activities measured? Just a few sample measures for assessing HR performance drivers could be employee attitude surveys, employee turnover, level of organizational learning, employee productivity, percentage of retention of high performing key employees, number of hours of training employees receive every year, and percentage of the workforce routinely working in a self managed team.  These types of measures allow the company to assess HR’s performance objectively and quantitatively, and also enable the HR manager to build a measurable and persuasive business case for how HR contributes to achieving the company’s strategic financial goals.

8.     Design HR Scorecard Measures – Find a balance of financial and non-financial goals, with both short and long-term foundations.

9.     Summarize the Scorecard Measures a in a Digital Dashboard – A digital dashboard usually presents information in a way that grabs management’s attention.  It displays a “bird’s eye view” of how the HR function is doing.

10.  Monitor, Predict, Evaluate - The HR Scorecard’s various measures will not always stay the same, and should be evaluated periodically to ensure they are still valid.

C.   The Hotel International:  An Example

This example illustrates how the multi-stop process for developing an HR Scorecard works. As a corporate strategy, the management and owners want to continue to expand geographically, believing that doing so will allow them to capitalize on their reputation for good service, by producing multi-city alternatives for guests. The challenge is that their reputation for good service has been deteriorating, thereby making the expansion strategy a risk since guest might actually prefer other hotels after trying the Hotel International. This example walks students through the steps involved in developing an HR management system.

1.   The Strategy - The strategy chosen by management is to use superior guest services to differentiate their properties, and increase the length of stays and return rate of guests, thereby boosting revenues and profitability.

 

2.   The Value Chain – Figure 3.12 outlines the value chain. Inbound logistics activities (getting guests from the airport and checked in, operations activities (cleaning the guest’s room); outbound logistics activities (picking up baggage), marketing and sales activities (attracting guests to the hotel), service activities (travel awards) and support activities (purchasing, information systems, HR). The question for the HR manager is “given our strategic goals, how can HR management help our hotel achieve its goals by adding value to each of the hotel’s core value chain activities?” 

3.   The Strategically Required Organizational Outcomes – the outcomes that the Hotel International is seeking includes fewer customer complaints, more written compliments, more frequent guest returns, longer stays, and higher guest expenditures per visit.

4.   The Strategically Relevant Workforce Competencies and Behaviors – Based on the value chain analysis, competencies and behaviors identified are “high quality front-desk customer serivce”, “taking calls for reservations in a friendly manner”, “greeting guests at the front door”, and “processing guests’ room service meals efficiently”.

5.   The Strategically Relevant HR System Policies and Activities – Here  HR deliverables are identified to produce the crucial workforce competencies and behavior. For example, in order to produce “high quality front-desk customer service,”, an HR deliverable of instituting practices to improve disciplinary fairness and justice in the company with the aim of improving employee morale is identified.

6.   The HR Scorecard – Metrics are selected to show the links among the HR activities, workforce behaviors and organizational outcomes.  The Scorecard is illustrated in Figure 3.13. For example, metrics of grievance activitiy, scores on attitude surveys, and customer complaints are chosen for inclusion in the scorecard.

Improving Productivity Through HRIS:  Software Systems for Managing Scorecard Programs.  The balanced scorecard does for the company as a whole what the HR scorecard does for the HR function.  It is a management tool (usually a computerized model) that traces a multitude of performance measures simultaneously and shows their interactions across the company. The balanced scorecard includes multifunctional metrics that top management believes contribute to the company’s strategic success.

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NOTES

Educational Materials to Use

DISCUSSION QUESTIONS

1.   What is the difference between a strategy, a vision, and a mission?  Please give one example of each.  A strategy identifies a course of action to get the company from where it is today to where it wants to be tomorrow.  One example of a company’s strategy given in the text is Dell Computer’s strategy to be a “low cost leader” by using the Internet and phone to sell PCs directly to end users at prices competitors cannot match. A vision is a general statement of the company’s intended direction that evokes emotional feelings in employees.  It is a “mental image” of a possible and desirable future state for the organization, and articulates a view of a realistic, credible, attractive future of the organization that is better than what now exists. The mission is a more specific and shorter term statement which lays out what is supposed to be now, communicating “who we are, what we do, and where we’re headed”.

2.   Define and give at least two examples of the cost leadership competitive strategy and the differentiation competitive strategy.   The cost leadership competitive strategy means that the enterprise aims to become the low-cost leader in an industry. In a differentiation competitive strategy, firms seek to be unique in its industry along dimensions that are widely valued by buyers. 

3.   Explain how HR can help a company create its competitive advantage.  Human Resources is regarded in a growing number of organizations as a source of competitive advantage, through recruiting, selecting, retaining and developing human capital that enables organizations to compete on a number of different levels to be flexible, capable, and responsive, demonstrating creativity and innovation in order to produce products and services of high quality.

4.   What is a high performance work system?  Provide several specific examples of the elements in a high performance work system.  High Performance Work Systems are characterized by high involvement organizational practices, (such as job enrichment and team-based organizations), high-commitment work practices (such as improved employee development, communications, and disciplinary practices), and flexible work assignments. The evidence suggests that companies that employ HPWS practices produce better productivity, quality, sales and financial performance. What makes the HPWS unique is the quality, quantity, and specific features of the HR policies and practices.  Each element is designed to maximize the overall quality of human capital throughout the organization. Several characteristics of high performance work organizations include multi-skilled work teams; empowered frontline workers; more training; labor management cooperation; commitment to quality; and customer satisfaction.

5.   Define what a HR Scorecard is, and briefly explain each of the seven steps in the HR scorecard approach to creating a strategy oriented HR system.  The HR Scorecard is a concise measurement system that shows the metrics the firm uses to measure HR activities, measures the employee behaviors resulting from these activities, and measures the strategically relevant organizational outcomes of those employee behaviors.  It highlights the causal link between the HR activities, and the emergent employee behaviors, and the resulting firm-wide strategic outcomes and performance.

The ten steps involved in the HR scorecard approach are as follows:

1.     Define the business strategy – In this step, management translates its broad strategic plans into specific actionable goals.

2.     Outline the company’s value chain – Here the manager identifies the strategically relevant outcomes and required employee behaviors by identifying the value chain, which identifies the primary activities that create value for customers and the related support activities.  The value chain is a tool for identifying, isolating, visualizing, and analyzing the firm’s strategic activities and strategic costs.  This step allows managers to better understand the activities that drive performance in their company.

3.     Outline a Strategy Map – A summary of the chain of major activities that contribute to a company’s success, the strategy map shows the “big picture” of how each department’s performance contributes to the achievement of company goals.

4.     Identify the strategically required organizational outcomes – In order to achieve its strategic goals, every company must produce critical, strategically relevant outcomes. 

5.     Identify the required workforce competencies and behaviors – Competencies and behaviors such as personal accountability, working proactively, motivation, courteous behavior, and commitment drive organizational performance by producing strategically relevant organizational outcomes.

6.     Identify the required HR system policies and activities – The question in this step is “what HR system policies and activities will enable us to produce those workforce competencies and behaviors?”  The answer might include things like special training programs or changing the compensation plan.  These policies and activities are often referred to as “HR enablers”, which create and make possible the HR “performance drivers” – the workforce competencies and behaviors that produce the strategically relevant organizational outcomes.  Once these enablers are identified, the next question that follows is, what specific form should these policies and activities take?  How and to what end should systems and processes be changed? The HR system must be aligned with the company’s specific strategic needs. At this point, the HR manager must become precise about the actual form and design of the firm’s HR deliverables.

7.     Create the HR Scorecard – In this step, the question is how are the organizational outcomes, workforce competencies and behaviors, and HR system policies and activities measured? Just a few sample measures for assessing HR performance drivers could be employee attitude surveys, employee turnover, level of organizational learning, employee productivity, percentage of retention of high performing key employees, number of hours of training employees receive every year, and percentage of the workforce routinely working in a self managed team.  These types of measures allow the company to assess HR’s performance objectively and quantitatively, and also enable the HR manager to build a measurable and persuasive business case for how HR contributes to achieving the company’s strategic financial goals.

8.     Choose HR Scorecard Measures – Find a balance of financial and non-financial goals, with both short and long-term foundations.

9.     Summarize the Scorecard Measures a in a Digital Dashboard – A digital dashboard usually presents information in a way that grabs management’s attention.  It displays a “bird’s eye view” of how the HR function is doing.

10.  Monitor, Predict, Evaluate – The HR Scorecard’s various measures will not always stay the same, and should be evaluated periodically to ensure they are still valid.

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EXPERIENTIAL EXERCISES & CASES

Continuing Case:  the Kwik and Kleen Laundry Company

1.     Would you recommend that the company expand its quality program?  If so, specifically what form should it take? Most students will agree that there are opportunities to expand the quality program.  The employee meeting approach is a good start in terms of utilizing high involvement organizational practices. There are opportunities to maximize the overall quality of their human capital.  For example, training seems to be an obvious area to focus in terms of educating and building awareness about basic standards and procedures.

2.     Assume the company wants to institute a high performance work system as a test program in one of its stores.  Write a one-page outline summarizing what such a program would consist of.   Students should include some of the following ideas in their outline:  Identify the types of HR practices it would implement to improve quality, productivity, financial performance; methods for job enrichment; strategies for implement and leverage a team-based organization; ways to implement and facilitate high commitment work practices; employee development and skill building to foster increased competency and capability in the workforce; a compensation program which provides incentives (for example profit sharing; pay for performance) for achieving major goals and financial targets.

KEY TERMS

competitive advantage             Any factors that allow an organization to differentiate its product or service from those of its competitors to increase market share.               

HR scorecard                           A concise measurement system that shows the quantitative standards, or “metrics” the firm uses to measure HR activities, to measure the employee behaviors resulting from these activities, and to measure the strategically relevant organizational outcomes of those employee behaviors.

metrics                                     Statistics used to measure the activities and results involved in a field.

mission                                    A more specific and shorter term statement which communicates for a company who they are, what they do, and where they are headed.

strategic control                       The process of assessing progress toward strategic goals and taking corrective action as needed.

strategic human                       Formulating and executing HR systems – policies and activities

resource management              – that produce the employee competencies and behaviors the company needs to achieve its strategic aims.

strategic management              The process of identifying and executing the organization’s mission, by matching the organization’s capabilities with the demands of its environment. 

strategic plan                           The company’s plan for how it will match its internal strengths and weaknesses with external opportunities and threats in order to maintain competitive advantage.

strategy                                    Specific courses of action the company pursues to achieve its aims.

SWOT Analysis                        The process of identifying company strengths, weaknesses, opportunities, and threats.

value chain analysis                 Identifying the primary activities that create value for customers and the related support activities.

vision                                       A general statement of a company’s intended direction that evokes emotional feelings in organization members.